Michalik v Earthquake Commission
[2014] NZHC 2238
•17 September 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-485-3167 [2014] NZHC 2238
UNDER THE JUDICATURE AMENDMENT ACT
1972
BETWEEN
P W MICHALIK Plaintiff
AND
EARTHQUAKE COMMISSION Defendant
Hearing: 12 May 2014 Counsel:
P W Michalik in person
J A Knight and N S Wood for DefendantJudgment:
17 September 2014
JUDGMENT OF WILLIAMS J
Introduction
[1] Mr Michalik owns (as trustee) and occupies a residential property in Highbury. It suffered a small landslip following a significant rain event in July 2012. A small retaining wall collapsed causing the material it retained to evacuate on to the ground at the toe of the wall. The Earthquake Commission (EQC) accepted Mr Michalik’s claim. But it paid him a sum that was considerably less than the estimated cost of reinstating the land and replacing the retaining wall with a modern compliant one.
[2] Mr Michalik says EQC is required to meet the full cost of replacing the retaining wall with a wall that complies with relevant regulatory requirements. It is common ground that this would result in a replacement wall that was not only new,
but substantially better than its predecessor.
MICHALIK v EARTHQUAKE COMMISSION [2014] NZHC 2238 [17 September 2014]
[3] EQC says it is only required, in this case, to pay a sum equal to the pre-slip value of the damaged portion of the wall exactly as it was constructed and without regulatory betterment.
[4] Mr Michalik seeks judicial review accordingly. In particular, he seeks the following:
(a) an order that EQC's decision to adjust his claim on the basis of the value of the land under the wall is unlawful and set aside;
(b) an order that EQC reconsider his claim on the basis that:
(i)EQC is obliged under the EQC Act to indemnify him against the natural disaster damage to the retaining wall; and
(ii)the correct measure of indemnity is the amount required to restore him to the position he would be in had the disaster not occurred; and
(iii)a valuer's assessment of the value of the land under the damaged retaining wall is not the correct measure of indemnity to which he is entitled; and
(iv)he will be properly indemnified if EQC pays the costs of the necessary repairs to the retaining wall, given he cannot replace the retaining wall by purchasing an equivalent second hand wall and faces repairs having to be carried out on his property;
(c) costs.
The facts
[5] The retaining wall in question retained an area of earth and fill a few metres from, and downhill of, the dwelling on site. The wall was 1.5m high. It was made of hollow, triangular concrete blocks joined with mortar. The wall was neither
reinforced nor drained. It did not comply with modern Building Act 2004 requirements. The dimensions of the individual concrete blocks were 600mm x
200mm x 300mm. In July 2012, a 3.7m long section of the wall collapsed after heavy rainfall causing retained earth and fill to evacuate and inundate the level ground at the toe of the wall. A fence and pavers above the wall and adjacent to the dwelling were undermined in the collapse.
[6] EQC instructed engineering firm Tonkin & Taylor to assess whether the damage was the result of a natural landslip, and, if so, to assess the extent of damage to the land and retaining wall. Mr Peters, an engineer of Tonkin & Taylor completed a report on those issues on 4 October 2012. He concluded that a land surface area of
3m2 had been evacuated; that this had caused the inundation of 4.5m2 of land below
the evacuation; and there was a further retained area of 1.5m2 at imminent risk of further evacuation, putting the same 4.5m2 of inundated land at risk of reinundation. This assessment meant that the total area of damaged or imminent risk land was 9m2.
[7] Mr Peters further concluded that a 5.5m2 area of the face of the retaining wall was destroyed, and another 1m2 area of the surviving portion of the wall was at imminent risk of further collapse. Mr Peters prepared a “conceptual solution” for reinstatement. In this, he estimated that the cost of reinstating the damaged land,
removing the area of imminent risk and reconstructing the retaining wall would be around $18,000. In his affidavit he said that the new retaining wall would be better than the old one. It had to be in order to comply with current Building Act requirements.
[8] On 26 October 2012, EQC then instructed Williamson Contractors, a firm of contractors, to prepare and cost a scope of works based on the Tonkin & Taylor conceptual solution. The contractors set the overall cost of reinstatement at
$23,694.61 (including GST), somewhat more than the Tonkin & Taylor guesstimate.
[9] EQC then instructed Darroch Ltd, a firm of valuers, to value the lost or damaged land and retaining wall. Chris Pātete, a valuer with that firm, provided a brief report to EQC on 7 December 2012. In it he valued the 9m2 of evacuated, inundated and imminent risk land at $4,050. He set the “indemnity value” of the
damaged and imminent risk sections of the retaining wall at $3,130. Just what is meant by the term indemnity value is a central issue in this case. It is sufficient at this juncture to record that the combination of these two figures gave a total value of
$7,180.
[10] EQC advised Mr Michalik by letter dated 24 December 2012 that it accepted liability for the lesser of the two sums (that is the lesser of $23,694.61 and $7,180). EQC then therefore paid $6,462 to Mr Michalik – being $7,180 less the applicable
10 per cent excess in accordance with cl 1, Sch 3 of the Earthquake Commission Act
1993 (the EQC Act), and reg 4(1)(b) of the Earthquake Commission Regulations
1993.
[11] The controversy that then developed between the parties to this litigation relates, as I have said, to the manner in which EQC calculated its liability in relation to the retaining wall.
[12] Mr Michalik then remonstrated further with EQC. In an email dated
11 January 2013 from an EQC “claims consultant” – no name was given – the consultant attempted to explain the basis for the calculation. Reference was made to s 19 of the EQC Act. The email provided in part:
This means the cover provided by the Act for land damage is limited to the lesser of the value of the land that has been damaged or the cost to remediate the damage.
[13] Mr Michalik wrote further to the consultant. He set out his argument and various propositions of law. He said EQC misconstrued the legislation. On Friday
25 January 2013, the consultant replied (inter alia):
… EQC determine (sic) the indemnity value using a depreciated replacement cost approach – taking into consideration the age, condition and remaining useful life of the [retaining wall] structure.
[14] Unhappy with this explanation, Mr Michalik then lodged a formal complaint (having been invited to do so if he harboured ongoing concerns). Following a telephone conversation between Peter Monk (EQC complaint investigator) and Mr Michalik and various further written communications from Mr Michalik,
Mr Monk set out EQC’s final stance in a letter dated 8 March 2013. In the letter
Mr Monk said:
The indemnity value of the 5.5 metre area of the damaged retaining wall was defined as $2,650.00, following a valuation by an outsourced independent company. The valuator (sic) has used the information from the Tonkin and Taylor report on which to base its values for the land damage. The valuation report documented the cost per metre of the retaining wall at a higher value than the normal flat land, the land was valued at $450.00 per square metre whereas the retaining wall was valued at $481.00 per square metre which means the retaining wall value was not determined using the same criteria as the other damaged areas of your property. When comparing this to the remediation cost of the wall which was around $10,120.00 the land valuation of $2,650.00, the land valuation was deemed to be the cost which EQC was liable for not the cost to repair the wall to its condition before it was damaged.
EQC has determined there is no need to review the land claim settlement further at this point, the position remains. If you wish to contest the settlement of the land claim with EQC you may wish to provide independent professional reports for EQC to review as per Schedule 2, Part 7, paragraph 3.
Mr Michalik’s evidence
[15] Mr Michlaik filed an affidavit outlining the facts largely as outlined above, and setting out why EQC had, in his view, failed to follow the requirements of the EQC Act, and failed to address concerns he consistently expressed to EQC staff.
The valuation evidence
[16] For EQC, a valuer, Chris Pātete, swore an affidavit outlining how he arrived at his valuation for the retaining wall. He said that since there was no market for in situ retaining walls, it was impossible to derive a valuation for it by assessing “the market”. Instead he took a “depreciated replacement cost” approach as mentioned by the complaint investigator, Peter Monk. Mr Pātete did this analysis in three steps. First he estimated the present day cost of building the same wall. He did not attempt to value a replacement wall that complied with modern requirements under the Building Act. Rather, he estimated the cost of building a retaining wall that was as close as possible to the damaged wall in materials and design, even though such a structure would not have complied with modern day regulatory requirements. He said he took this approach because his objective was to value the existing structure
by estimating the cost of replacing it, not to estimate the cost of a different structure. He assessed the full replacement cost of the existing asset at $5,070.1
[17] His next step was to address depreciation. He estimated the life of the structure at 80 years. He further estimated that the structure had been built in the
1970s. He therefore adopted a starting point of 1975 and estimated that the wall was approximately 37 years old when it was damaged in 2012. He then applied a straight line depreciation calculation to deduct 46 per cent of the value (37 out of 80 years) giving a total value after depreciation of $2,275. He then added 15 per cent GST producing a final of $3,134, at a unit value of $482.00 per square metre.
[18] Mr Pātete finally took the rounded figure of $480/m2 and multiplied it by
6.5m2 being the area of actual damage (5.5m2) plus imminent risk (1m2) before arriving at a final figure of $3,130.
[19] A further affidavit was filed by David Townsend, a registered valuer. His evidence largely affirmed the approach Mr Pātete took as correct in the circumstances as a matter of valuation practice. He accepted that there is no firm valuation rule requiring such an approach, but he referred to the Australia and New Zealand Valuation and Property Standards Manual, Guidance Note 13, which, he said, affirmed the correct interpretation of indemnity value, and what is meant by depreciated replacement cost. According to cl 2.8 of Guidance Note 13:
Indemnity value is typically defined as follows:
The cost necessary to replace, repair and/or rebuild the asset insured to a condition and extent substantially equal to but not better or more extensive than its condition and extent at the time the damage occurred, taking into consideration the age, condition and remaining useful life of the asset.
[20] Mr Townsend accepted that there may be cases where a retaining wall is a large enough element in the value of a property, that it can be separately assessed: that is the market value of the property can be assessed with and without the
retaining wall in situ, the difference being the value of the wall. But in this case, he
1 $600/m2 x 6.5m2 (being 5.5m2 damaged and 1m2 at imminent risk) plus 30 per cent for fees and consents.
said, the retaining wall was too small for that approach to be viable. Depreciated replacement cost was therefore, he said, the only practical methodology in these circumstances.
[21] Mr Townsend also considered that in estimating the useful life of the retaining wall at 80 years, Mr Pātete’s judgement was consistent with industry practice. He agreed with Mr Pātete’s conclusions.
Mr Searle’s evidence
[22] An affidavit was also sworn by EQC’s National Operations Manager, Barry Searle. He is responsible manager for, among other things, non- Canterbury earthquake events. Mr Searle explained EQC’s standard approach to dealing with claims such as Mr Michalik’s, appending relevant documents where necessary.
The legislation in brief
[23] Section 29(2) of the EQC Act provides that the EQC must settle any claim in relation to property that suffers “natural disaster” damage “to the extent to which it is liable under [the] Act”. The subsection further provides that EQC may choose to settle such claim by making a payment to the claimant, replacing the damaged property or reinstating it. This means that if undertaking repair or replacement are more cost effective, then EQC may choose that option. Otherwise a payment is to be made.
[24] The term “natural disaster” is defined in s 2. The definition includes natural landslips. It is common ground that the damage suffered in this case was as a result of a natural landslip and therefore of a natural disaster.
[25] Part 2 of the EQC Act provides for the insurance of residential properties against such natural disasters. Section 18 relates to “residential buildings”. Although the retaining wall is not a residential building, the distinctive way in which the EQC Act sets the value of losses in relation to residential buildings is relevant context so it is worth reviewing.
[26] Section 18 provides that residential buildings are deemed to be insured against natural disaster damage for their “replacement value” up to $100,000 (excluding GST) for each dwelling on site. “Replacement value” is comprehensively defined in s 2 as follows:
replacement value means–
(a) in relation to a residential building, any costs which would be reasonably incurred in respect of–
(i) demolition and removal of debris, to the extent that is essential to enable the building to be replaced or reinstated; and
(ii) replacing or reinstating the building to a condition substantially the same as but not better or more extensive than its condition when new, modified as necessary to comply with any applicable laws; and
(iii) complying with any applicable laws in relation to the replacement or reinstatement of the building; and
(iv) other fees or costs payable in the course of replacing or reinstating the building, including architects’ fees, surveyors’ fees, and fees payable to local authorities …
[27] In summary, that means EQC must meet the cost of rebuilding a dwelling that complies with resource consent and Building Act requirements but is otherwise without betterment. EQC’s maximum liability is $100,000 per dwelling (excluding GST).
[28] Section 20 relates to coverage in respect of “personal property”. It also sets the measure of coverage at replacement value. EQC’s liability for personal property is capped at a maximum of $20,000 (excluding GST).
[29] Section 19 deals with coverage in relation to “residential land”. It provides
as follows:
Subject to any regulations made under this Act and to Schedule 3, where a residential building is deemed to be insured under this Act against natural disaster damage, the residential land on which that building is situated shall, while that insurance of the residential building is in force, be deemed to be insured under this Act against natural disaster damage to the amount (exclusive of goods and services tax) which is the sum of, in the case of any particular damage,
(a) the value, at the site of the damage of–
(i) if there is a district plan operative in respect of the residential land, an area of land equal to the minimum area allowable under the district plan for land used for the same purpose that the residential land was being used at the time of the damage; or
(ii) an area of land of 4,000 square metres; or
(iii) the area of land that is actually lost or damaged whichever is the smallest; and
(b) the indemnity value of any property referred to in paragraphs (d) and (e) of the definition of the term residential land in section 2(1) that is lost or damaged.
(my emphasis)
[30] “Residential land” is defined in s 2(1) as:
residential land means–
in relation to any residential building, the following property situated within the land holding on which the residential building is lawfully situated:
…
(e) all retaining walls and their support systems within 60 metres, in a horizontal line, of the building which are necessary for the support or protection of the building or of any property referred to in any of paragraphs (a) to (c).
(my emphasis)
[31] It is thus noteworthy that residential buildings and personal property are insured to full replacement value up to the stated maximums; residential land is insured to the full value of the damage or loss at the site (within the parameter of the three maximum area options set out in s 19); while bridges, culverts and retaining walls on residential land are insured to their “indemnity value”.
[32] It is common ground that the retaining wall in is a retaining wall in terms of s 2(1) and is thus residential land for the purposes of s 19 alongside the actual land lost or damaged. So, the effect of s 19 in light of the small area of land involved in this case, is that EQC is liable to meet a claim for the actual area of land lost or damaged together with the “indemnity value” of the retaining wall.
[33] For completeness, I note that physical loss or damage is defined in s 2 as including not just actual physical loss or damage but also loss or damage that is imminent. This is why Tonkin & Taylor calculated the imminent risk portions of the land and retaining wall.
Arguments
[34] There is no definition of “indemnity value” in the Act. Mr Michalik says the particular circumstances of retaining walls are such that the indemnity value should be taken to mean “replacement value”. That is because retaining walls are permanent, passive structures with an indefinite life span. This, he says, is the only fair approach.
[35] Mr Michalik mounted his case at two levels. First, he referred to his correspondence with the unknown “claims consultant” and the complaints investigation officer (Mr Monk) at EQC to argue that EQC applied the wrong test by failing to consider the question of indemnity value at all, or at least not in accordance with the statutory definition. The correspondence, Mr Michalik submitted, established that EQC misunderstood the correct test believing instead that the EQC Act required it to choose between the value of the land or the cost of reinstating the wall.
[36] Mr Michalik submitted that the affidavits filed after the event by individuals other than those who made the actual decision, were beside the point and irrelevant. He submitted therefore that the affidavits of Messrs Searle, Peters, Townsend and Pātete should all be set to one side. The focus should be, according to Mr Michalik, on his communications with the anonymous claims consultant and Mr Monk.
[37] At the second level, Mr Michalik argued that indemnity value is not arrived at by means of a rigid formula. Rather, the correct approach must be determined on a case-by-case basis and by reference to the particular circumstances of each case. He argued that depreciated replacement cost is not the correct approach to deciding indemnity value in this particular case. In this case, he submitted:
(a) retaining walls have an indefinite lifespan and so it is wrong to depreciate their value to zero over 80 years;
(b)it was wrong to value the area of wall damaged because in effect the entire wall was no longer useful and needed replacement;
(c) in this case therefore, indemnity value should be taken to mean the full cost of replacement;
(d)there is no betterment in building a wall that complies with modern regulatory requirements. The crucial point is that the new wall will perform the same function as the old wall.
[38] In reply, EQC argued that there was no evidence that the wrong test was applied. Mr Knight, for EQC, argued that the best evidence of the test that was applied in this case is the advice of the engineers Tonkin & Taylor and the valuers Darroch Ltd in December 2012. That advice shows that the EQC applied an indemnity value calculation to the damaged retaining wall in deciding that value by way of depreciated replacement cost.
[39] In addition, Mr Knight argued that EQC made its decision in December 2012 and notified Mr Michalik of the same by letter dated 24 December 2012. The decision was based on the advice referred to above. The correspondence with EQC officials to which Mr Michalik refers all occurred in 2013 and so was beside the point.
[40] In addition, the reference in the 11 January 2013 correspondence to valuing loss or damage to “the land” was, Mr Knight submitted, clearly shorthand for “residential land” in accordance with s 19. This meant that EQC was right when the unnamed claims consultant wrote that the choice for EQC was between the value of the damaged land and the cost to remediate.
[41] The real issue, Mr Knight argued, is what measure of coverage is contained
in the term “indemnity value” in s 19(b). In this case, he argued, because of the
special nature of retaining walls, indemnity value means depreciated replacement value, and is to be contrasted with replacement value simpliciter as defined in s 2(1). Mr Knight pointed to the ordinary meaning of indemnity value, the scheme of the EQC Act, the history of the legislation, case law under previous legislation, and valuation practice in support of his interpretation.
[42] This case therefore raises two key issues:
(a) Did EQC turn its mind to the “indemnity value” of the retaining wall
at all in calculating Mr Michalik’s entitlement?
(b)Did EQC apply the correct methodology for assessing “indemnity value” when it adopted a “depreciated replacement value” approach to deriving that value?
[43] There is a third issue that I will address briefly at the end: should EQC have valued replacement of the entire wall rather than just the part identified by Tonkin & Taylor as damaged?
Did EQC turn its mind to “indemnity value”?
[44] There is, in my view, no question that EQC purported to apply the indemnity value test in relation to the retaining wall as required by s 19. Whether it applied that test correctly is the subject of the next question.
[45] Mr Michalik is wrong when he argues that the correspondence from the EQC claims consultant dated 11 January 2013 provided evidence that EQC did not even purport to apply that test. I agree with Mr Knight who submitted that when the EQC claims consultant referred in that letter to the fact that EQC had a choice in setting compensation for the loss between the lesser of “land value” or the cost of the remediation of the wall, he or she must be taken to have been referring to the residential land value as required by s 19 and defined in s 2(1). As I have said, residential land is expressly defined in s 2(1) to include, along with the land itself, any retaining walls and their support systems within 60m of a residential building
that the wall protects or supports. The terminology the consultant used was somewhat loose, but not wrong.
[46] EQC did have a choice between the lesser of the value of the wall and the cost of remediating it. This is confirmed in s 29(2).
[47] The more important point is that the EQC correspondence cited by Mr Michalik (I include here the 11 January 2013 letter as well as later correspondence), is all created after EQC has made its decision and communicated it. Notice of the decision was provided to Mr Michalik by letter dated
24 December 2012. The compensation provided for in that letter reflected precisely the damage assessment undertaken by Mr Peters of Tonkin & Taylor and the valuation assessment undertaken by Mr Pātete of Darrochs Ltd. The obvious, indeed inexorable conclusion is that EQC can only have followed Mr Pātete’s depreciated replacement cost approach to valuing the damage to the retaining wall. Mr Pātete said this was the correct methodology for deriving indemnity value. It must follow that EQC turned its mind to indemnity value. I find therefore that the first ground has no merit.
What methodology should EQC have used in deriving the “indemnity value” of
the retaining wall?
[48] For the reasons largely consistent with those advanced by Mr Knight, I have concluded that EQC adopted the correct approach when it applied depreciated replacement cost methodology to derive the indemnity value of the wall. In my view that approach is consistent with the terms of the EQC Act, relevant legislative history and with generally applicable principles of insurance law. Even if that is wrong, Mr Michalik’s argument rested on a factual contention as to the nature and durability of retaining walls. In that regard, he argued “a new wall of indefinite life replacing an old wall of indefinite life is no betterment.” He asserted that retaining walls do not depreciate in fact. Mr Michalik called no expert or other evidence in relation to these matters. I am left therefore with the evidence from the valuers – Pātete and Townsend – both of whom say that 80 years is an appropriate estimate of the useful life of such a wall. Mr Michalik’s submission was effectively that this contention is so obviously wrong that I should take judicial notice of the fact that retaining walls
last indefinitely. Not being an expert in retaining walls, I much prefer to defer to professionals with some knowledge in the area. Even if there was a contest between experts on each side who had particular knowledge of the durability of retaining walls, judicial review is hardly the procedure by which these matters should be resolved.
[49] I now set out the considerations that informed my conclusion.
The scheme of ss 18, 19 and 20
[50] The starting point is the obvious one. Sections 18 and 20, dealing with residential dwellings and personal property respectively, each provide for replacement cover calculated in accordance with the relevant formulas up to a stated cap. Residential land is calculated according to “value”, subject to the restrictions contained in s 19(a). It is only bridges, culverts and retaining walls that are covered to indemnity value. Indemnity value and replacement value must necessarily be different things.
[51] As I have said, indemnity value is not defined in the EQC Act, but indemnity clearly connotes protection against loss. The Concise Oxford Dictionary defines the term as follows:2
Security or protection against a loss or other financial burden.
[52] Mr Knight also referred to the Dictionary of Insurance & Finance Terms
provides the following definitions:3
Indemnity
Undertaking that provides an exact financial compensation for loss or damage. Indemnity may be in the form of replacement or repair of property loss or damage, or provision of cash to the value of the property. The commonest indemnity is an insurance policy, in which the policy holder is indemnified by the insurance company in the event of a valid claim. The aim is always to place the insured in the exact financial position after a loss as he or she enjoyed immediately before that loss occurred.
2 Judy Pearsall (ed), The Concise Oxford Dictionary (10th ed, Oxford University Press, Oxford,
2002).
3 John Clark (ed), Dictionary of Insurance & Finance Terms (Prospect Media, Sydney, 1999).
Indemnity basis cover
In household contents insurance a type of cover for the actual value of the item insured (taking into account age and depreciation).
[53] The principle then is that indemnity value is the actual loss suffered, not the cost of new for old if that involves more than the actual loss. The relevant value can only be the value of the item immediately before loss or damage taking into account its age and condition and therefore its likely remaining life. Depreciation is a useful proxy for those factors.
[54] This is consistent with the approach taken by EQC in this case and with the
history of New Zealand’s disaster insurance legislation to which I now turn.
Legislative history
[55] The Earthquake Commission Act 1993 superseded the Earthquake and War Damage Act 1944. The background to the 1944 Act was discussed by Barker J in Bay Milk Products Ltd v Earthquake and War Damage Commission a case to which I will return below.4 For present purposes, it is worth summarising some of that background.
[56] The 1944 Act had itself replaced a 1941 measure, the War Damage Act 1941. By 1944 the threat of bombing raids and invasion was rapidly receding, and there had been an earthquake in Masterton at the time to remind New Zealanders that earthquakes were a more present danger in this country than war.
[57] The 1944 Act was therefore enacted providing coverage for earthquake as well as war damage. There was already a large unused war damage fund available that could be redirected toward this wider purpose. Coverage was linked to private fire insurance. From that insurance, property owners would pay a compulsory levy to the fund creating thereby a statutory indemnity scheme.
[58] Initially only buildings were covered. Land and ancillary fixtures within the land, such as retaining walls, were specifically excluded by regulation from the
4 Bay Milk Products Ltd v Earthquake and War Damage Commission (1989) 5 ANZ Ins Cas
75,975 (HC).
otherwise broad ambit of s 14 of the Act.5 But, unlike the 1993 EQC Act which covers only residential property, the 1944 Act covered all buildings including, as the Bay Milk Products case demonstrates, factories.
[59] Levies under the 1944 Act were calculated on an indemnity value and coverage was also on that basis. It seems that this was primarily because it was not until the late 1940s or the early 1950s that the insurance industry began to market full replacement cover – described as excess over indemnity – as a distinctive insurance product. Amendments were duly made in 1951, to s 14 of the Act to deal with this change in the industry. They are worth setting out in full:
(2A) Where the contract of fire insurance provides for settlement of any claim for damage to or destruction of the property upon a basis more favourable to the insured person than its indemnity value–
(a) The property shall be deemed to be insured under this section to the amount of the indemnity value only:
(b) The earthquake and war damage premium in respect of each period of the insurance shall be computed on the amount of the indemnity value of the property as approved by the Commission after being certified at the commencement of that period by a valuer approved by the Commission, being a registered member of the New Zealand Institute of Architects or by a valuer registered under the Valuers Act
1948 or an engineer registered under the Engineers
Registration Act 1924:
Provided that if no such certificate is approved by the Commission in respect of any period the premium shall be computed on the amount to which the property is insured under the contract.
(2B) This section shall not apply with respect to any contract of insurance that is limited to an excess over the indemnity value of the property.
[60] The amendment is explicit that replacement value was considered by
Parliament to be higher than indemnity value. Coverage under the amended 1944
Act was explicitly confined to indemnity value only. This meant that levies charged via private fire insurance contracts could be potentially too high in the case of full replacement policies. That is because levies were fixed as a set proportion of the
premiums payable under those contracts. The amendments to s 14 addressed that problem. All of this was confirmed by the Minister in his second reading speech.6
We are all aware of the provisions of ordinary fire policies, but the practice has grown up of taking out replacement policies. Policies are taken out by business people which, in view of the greatly increased cost of building, provide that in the event of a disaster they shall receive sufficient money to replace their buildings; and so the amendments made in this Bill have been asked for. As we know, an insurance policy is one of indemnity only, and hitherto the earthquake and war damage premium has been chargeable on all fire-insurance policies. The amendments in this bill provide that in the case of a replacement policy the compulsory earthquake and war damage insurance will be for the amount of the indemnity value only, and that, if the indemnity value is certified by a registered architect or valuer, the earthquake and war damage premium will be charged on the amount so certified. If there is no such certification, the premium is payable on the total amount of the insurance.
[61] Thus indemnity value was, in the legislation immediately preceding the 1993
EQC Act, seen as something less than replacement value – that is excess over indemnity value. Indemnity value was focused on identifying the actual value of the item immediately before it was damaged or lost. Excess over indemnity value as provided in s 14(2B) of the 1944 Act contained an element of betterment because it, by definition, provided coverage that was greater than actual value.
[62] In 1984, the Earthquake and War Damage regime was further amended, this time in response to the infamous Abbotsford land slip in Dunedin. The 1984 changes introduced for the first time coverage in respect of the land itself. Regulation 6(1) of the Earthquake and War Damage (Land Loss) Regulations 1984 introduced a methodology for calculating the area of land that would be covered under the 1944 Act in the case of disaster or land slip. That area was to be the smallest of three options: the minimum area of land that would be developable for
the same purpose under the local district planning scheme, 4,000m2 or the actual area
lost or damaged. This is essentially the same formula as now contained in s 19 of the
1993 Act.
[63] Regulation 5(1)(f) introduced specific coverage for:
All retaining walls and their support systems within 60 metres in a horizontal line, of the insured building.
[64] There was no express provision in relation to the value of coverage. It is to be remembered that all coverage under the 1944 Act was to indemnity value only, so express provision in respect of coverage value of retaining walls was unnecessary. The essence of reg 5(1)(f) was carried through into the 1993 Act in paragraph (e) of the definition of residential land in s 5.7
[65] Section 19(b) of the 1993 EQC Act, as I have already said, expressly restricted coverage to indemnity value only. That was necessary because, subject to the respective statutory caps, coverage for other items had shifted from indemnity value under the 1944 regime (as amended in 1984) to full replacement value under the 1993 Act.
[66] Drawing those threads together, the following conclusions may be drawn:
(a) Regulations 5(1) and 6(1) of the 1984 Regulations pertaining to coverage for retaining walls were carried through into ss 5 and 19 of the 1993 Act;
(b)Coverage under the 1944 Act for fixtures such as buildings and retaining walls was necessarily set at indemnity value and this was understood by the drafters of the legislation to be less than “excess on indemnity” or full replacement value.
(c) The 1993 EQC Act made it explicit that coverage under that Act would be at the lower value because, unlike the old regime, that issue could not be left to implication.
[67] The issue of indemnity value is touched on in the two leading cases under the
1944 legislation and, for completeness, I should mention them. The first is
AMP Fire and General Insurance Company (NZ) Ltd v Earthquake and War
7 Though I note that to be covered under the 1993 EQC Act, the wall had to be necessary to protect either buildings or land around the building or access way.
Damage Commission.8 In that case, there was a disagreement between insurance companies and the Commission over the methodology for calculating the compulsory levy. The Commission argued that in the case of combined indemnity and excess of indemnity polices, it was entitled to levy the full amount of the premium charged and not just the indemnity value part. Cooke J applied the amendments to which I have made reference and confirmed that they set all coverage at indemnity value and that this was necessarily less than replacement value:9
[T]he basic purpose of the amendments made in 1951 was clearly to ensure that the automatic statutory cover would be limited to indemnity insurance and that the premiums for it would be calculated accordingly … Nevertheless, when an indemnity sum is named and there is provision in certain circumstances for extra replacement insurance above that, there is not likely to be any difficulty in treating the provision for that extra cover as an identifiable and distinct part of the policy …
[68] And further:10
Not only has the expression “indemnity value” been left undefined by Parliament, but there is no evidence before the Court of any established usage in the insurance industry giving a fixed meaning to the expression or distinguishing between it and the other expression used by counsel, indemnity sum. That being so, the Court is free to and should place on “indemnity value” in the section the meaning that best gives effect to the apparent intention of Parliament.
[69] The Judge then cited and affirmed the following passage from Halsbury’s
4th edition:11
3. The principle of indemnity. Most contracts of insurance belong to the general category of contracts of indemnity in the sense that the insurer’s inability is limited to the actual loss which is in fact proved. The happening of the event does not of itself entitle the insured to payment of the sum stipulated in the policy; the event must in fact result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He cannot recover more than the sum insured, for that sum is all that he has stipulated for by his premiums and it fixes the maximum liability of the insurers. Even within that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being one of indemnity, and of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been
8 AMP Fire and General Insurance Company (NZ) Ltd v Earthquake and War Damage
Commission (1983) 2 ANZ Ins Cas 60-529 (CA).
9 At 78,020.
10 At 78,021.
11 At 78,021; citing Halsbury’s Law of England (4th ed, 1978) vol 25 at [3].
his estimate of what his loss would be likely to be and whatever the premiums he may have paid, calculated on the basis of that estimate.
[70] Thus, the crucial idea in orthodox “indemnity value” insurance is that it focuses on actual loss able, objectively, to be proved. The Court rejected the Commission’s argument that it was entitled to calculate its levy on the premium for replacement cover.12
[71] The second case is Bay Milk Products Limited – to which I have already made mention. The plaintiffs’ dairy factory in Edgecombe had been extensively damaged in the 1987 Edgecombe earthquake. The plaintiffs wished to rebuild it, but (insofar as relevant to this case) environmental controls were more rigorous in the late 1980s than they had been when the original factory was built some years earlier. The question was whether the Earthquake and War Damage Commission was liable under the 1944 Act to cover the extra cost of the upgrade to a standard when it would be regulatory compliant. At first instance Barker J started with the principles
enunciated in AMP:13
In the context of the New Zealand Act as interpreted by the Court of Appeal in the AMP case, there is no difference between an obligation to pay “indemnity value” and an obligation to “make good”. The word “indemnity” means usually that the plaintiff should be restored exactly to the position it was in before the earthquake.
[72] But the Judge accepted the plaintiffs’ argument (also, in a slightly different
way, made in this case) that the uniqueness and sophistication of its plant were such that indemnity value, in the circumstances of that case, ought to mean full
12 For completeness, I note that the same issue arose in the context of compulsory Fire Service Commission levies in the more recent case of Insurance Brokers Association of New Zealand Incorporated v New Zealand Fire Service Commission [2012] NZHC 3437. Section 48 of the Fire Service Act 1975 provided for levies calculated on the basis of “indemnity value”. The section specifically excluded policies or part policies that related to “excess over the indemnity value” of the property. Heath J made declarations essentially consistent with the Court of Appeal’s decision in AMP Fire and General Insurance. The relevance of this to the current proceeding is that the 1975 Fire Service Commission legislation had its genesis in the 1944 Act (see Heath J’s discussion at [31]). This judgment was upheld in New Zealand Fire Service Commission v Insurance Brokers Association of New Zealand Inc [2014] NZCA 179. Of interest in the appeal is the fact that counsel agreed on a definition of indemnity value as follows; referred to at [5]:
“The term ‘indemnity value’ means the depreciated replacement cost of insured property, or its current market value, depending on the nature of the property and the purpose for which it is held by the insured.”
The Court indicated its agreement with the definition.
13 Bay Milk Products Ltd v Earthquake and War Damage Commission, above n4, at 75,990.
reinstatement. He relied on a line of decisions that emphasised the uniqueness of the item insured as a basis for full reinstatement compensation even though the contract was for indemnity value only.14
[73] Barker J also referred to the Australian case in Lucas v New Zealand Insurance Co Ltd in which Crockett J found that the correct focus in calculating loss was the value of the relevant property to the insured.15 There are circumstances, Crockett J seemed to say – a house as a home or a building as a factory – in which the insured may be entitled to new for old so that reinstatement value is the proper measure within the stipulated contract value, even though that value may exceed the
actual market value and therefore the objective loss. A similar point was made by Lord Denning in Harbutt's Plasticine Ltd v Wayne Tank & Pump Co Ltd in respect of the reinstatement of a plasticine factory.16
[74] Barker J accepted these arguments and found:17
The upper limit of the Commission’s liability must always be the indemnity value shown in a particular schedule [that is the value specifically adopted by the insured certificates of indemnity value under s 14(2A)]. However, within that limit, the duty to indemnify can mean, in a particular instance, that the Commission may have to pay more than the bricks and mortar depreciated value of a given building should further cost be needed to allow the plaintiff to carry on in that building the self-same operations as those conducted prior to the earthquake.
Whether this principle of indemnity applies, and the extent to which it applies will need to be determined in any given instance in respect of any given schedule. That will be one of the tasks of the arbitrator whom I propose to appoint.
[75] Two points may be drawn from this. The first, that the default position for indemnity value is that it is a depreciated value. The second, that an exception may be made where the item insured has unique characteristics making depreciated value
inappropriate.
14 At 75,991; for example, Birmingham Corporation v West Midland Baptist Trust Association (1970) AC 874 in which Lord Reid (at 893) identified churches, schools, hospitals, houses of exceptional character and “business premises in which the business can only be carried on under special conditions or by means of special licences.”
15 At 73,991; citing Lucas v New Zealand Insurance Co Ltd (1983) 2 ANZ Ins Cas 60-506.
16 At 75,992; citing Harbutt's Plasticine Ltd v Wayne Tank & Pump Co Ltd (1970) 1 QB 447 at
468.
17 At 75,992.
[76] On appeal, Richardson J writing for the Court rejected that conclusion.18 He said:19
While the Act does not deal specifically with the costs of regulatory upgrade, it draws a clear distinction between indemnity cover and replacement cover. As between the two, the former provides cover for what was damaged based on the condition of the property at the time it was damaged; the latter provides for current replacement. The costs of regulatory upgrade tend to fit more naturally within replacement cover than within indemnity cover. Where the basis of calculation of indemnity value is the cost of reinstatement, what is contemplated is restoration to the condition in which the property was at the time of the loss, and therefore, as Ivamy, Fire and Motor Insurance (4th ed, 1984) at p171 notes, the amount of indemnity will not include increased cost of reinstatement due to regulatory upgrades unless that increase is specifically insured. The reason is that the costs of complying with such requirements were not part of the damaged structure and are not therefore properly included in the amount of the damage without such a specific clause.
(my emphasis)
[77] That in my view settles the matter. A unique circumstances argument was not available under the 1944 Act to increase indemnity value to reinstatement or full replacement. Still less is such an argument available in respect of retaining walls, culverts and bridges under the 1993 EQC Act. That last conclusion is for two reasons:
(a) the 1993 EQC Act picks up key principles of cover from the 1944 Act
– that is indemnity value under the 1993 EQC Act was plainly intended by Parliament at the time to have the same meaning as indemnity value under the 1944 Act; and
(b)unlike its predecessor, the 1993 EQC Act identifies two methods for valuing loss – replacement and indemnity value – and it specifically applies indemnity value to retaining walls.
General insurance principles
[78] Though, on my view of matters, it is not strictly necessary to turn to general principles of insurance law and practice, the matter was raised in argument and I propose to deal with it briefly.
[79] Mr Michalik pointed to a number of decisions in support of his argument that in some circumstances indemnity value can in fact equal full replacement value. I propose to mention two of them. (I mention the others below in the context of my discussion of the Tarr article).
[80] The first was the English Queen’s Bench decision in Pleasurama Ltd v Sun Alliance and London Insurance Ltd.20 The case concerned a bingo hall in Kirkcaldy, Scotland that had been significantly damaged by fire. The owner claimed the cost of reinstatement from the insurer. The insurer said it was liable only to pay the pre-fire market value of the property less its post-fire residual value. Parker J found that reinstatement was the appropriate measure.
[81] This case does not assist Mr Michalik. On the contrary, Pleasurama counts directly against Mr Michalik’s argument. Parker J found that where there was no identifiable market in order to establish the market value of bingo halls, then reinstatement was the only appropriate approach. But he was clear that the owner
was only entitled to the cost of reinstatement less depreciation.21 This is the
approach EQC took in the present case.
[82] As Mr Townsend and Mr Pātete confirmed in the present case, there is no identifiable market against which to establish an objective value of the retaining wall in this case. That is why the alternative methodology – replacement less depreciation was adopted. Thus, EQC essentially followed the Pleasurama approach.
[83] It is true that Parker J did consider whether the owner should be entitled to betterment from upgrade made necessary by new council bylaws, but once again he
said that would only be so if the policy specifically provided for it.22 Applying that principle to the 1993 EQC Act, the only form of coverage in which regulatory upgrade is specifically provided for is that under s 18, not that under s 19.23
[84] Mr Michalik also referred to the decision in Dawson v Monarch Insurance
Company where Somers J held:24
[A]n insured is not indemnified unless he is, so far as money can do so, restored to his position at the time of the loss. Thus where repair is appropriate, actual repair or cost of repair is the appropriate indemnity.
[85] This was another case where no market value could be ascertained. The damaged item was a large inflatable fairground rabbit. It was one of a kind. For different reasons, Mr Michalik is in a similar position here, because, as the experts say, it is impossible to establish a market value for the retaining wall.
[86] This decision provides no assistance to Mr Michalik either. I do not understand Somers J to be departing from the basic principle that age and wear and tear are to be taken into account in calculating the owner’s entitlement. That is inherent in the Judge’s finding that the plaintiff was entitled to be restored to the position he was in at the time of the loss. That is the actual cost of repair if the rabbit was repairable, or the rabbit’s value less depreciation if it was not.
[87] The general principle remains as expressed by Tarr in his article The Measure of Indemnity Under Property Insurance Policies:25
[T]he insurer is under an obligation to indemnify the insured only against his actual loss from the accepted risk; the insured must be restored, subject to the terms and conditions of the policy, to the financial position which he enjoyed immediately before the realisation of the peril insured against.
[88] That said, Tarr identifies some cases where somewhat different approaches have been taken to establishing actual loss – Falcon Investments Corporation (NZ)
Limited v State Insurance General Manager, Mercantile Mutual Insurance Company
22 At 394.
23 See the definition of “replacement” value in s 2(1)(a))(iii).
24 Dawson v Monarch Insurance Company [1977] 1 NZLR 372 at [377].
25 A A Tarr “The Measure of Indemnity Under Property Insurance Policies” (1983) 2 Canterbury
Law Review 107 at 109.
Limited v Amburla, Leppard v Excess Insurance Co Limited, Reynolds & Anderson v
Phoenix Assurance Company Limited and the Pleasurama case already mentioned.26
Tarr concludes there is no hard and fast rule, and sometimes indemnity value must be subjectively rather than objectively established:27
The cases discussed above demonstrate conclusively that the measure of indemnity is the loss suffered by the insured and not necessarily the value of the subject matter destroyed or damaged by the peril insured against. In determining the loss to the insured, there is no room for the application of some hard and fast rule. In each case the proper measure of indemnity is a matter of fact and degree. It would seem that if the insured has a genuine intention to reinstate he is entitled to have his loss settled on that basis taking into account depreciation – clearly where the premises are occupied by the insured for his own use and enjoyment or for the purpose of carrying on his trade or business, the insured cannot continue to use and enjoy the premises or carry on his business unless the property is reinstated, and the cost of this may be substantially more than the market value. Finally, in determining the loss to be insured, it is submitted that account may be taken of his intentions, his conduct and the nature of the subject matter of insurance.
(my emphasis)
[89] Whether subjective or objective factors are considered in calculating indemnity value, depreciation is always deducted. Thus, the general principles of insurance are consistent with the approach taken by the courts under New Zealand’s disaster insurance legislation.
[90] The same point is made by Campbell and Stewart.28 If the insured does not intend to sell the damaged property, then reinstatement will be the appropriate methodology, but even then:29
Where the cost of reinstatement is used as the measure of indemnity, an amount known as “betterment must” be deducted from that cost to determine finally the amount payable by the insurer. Betterment is the amount by which the reinstated property (containing new materials) is more useful or valuable than the pre-loss property (containing old materials). A deduction for betterment is a necessary corollary of the indemnity principle: the deduction ensures that an insured is not put in a better position, post- indemnity, than he or she was in prior to the loss.
26 Falcon Investments Corp (NZ) Ltd v State Insurance General Manager [1975] 1 NZLR 520; Mercantile Mutual Insurance Co Ltd v Amburla (1982) 2 ANZ Ins Cas 60-469; Leppard v Excess Insurance Co Limited [1979] 2 All ER 668; Reynolds & Anderson v Phoenix Assurance Company Limited [1978] 2 Lloyd’s REP 440, 453.
27 Tarr, above n23, at 115 (footnotes omitted).
28 N Campbell and B Stewart “Prevention of Performance in Replacement Cost Insurance –
Preventing a Fictional Response” (2002) 10(2) Otago Law Rev 229 at 231 (footnotes omitted).
29 At [231].
[91] This principle (whether related to the construction of the 1993 EQC Act or principles of insurance law) is, in addition, consistent with valuation practice, as we have seen in the evidence of the registered valuer, Mr Townsend. In this case, we have the advantage that was not available to the Court of Appeal in AMP Fire and General Insurance Company. We do have evidence of valuation practice in the insurance context. Mr Townsend, as I have said, pointed to cl 2.8 of Guidance Note
13 which defined indemnity value as:30
The cost necessary to replace, repair and/or rebuild the asset insured to a condition and extent substantially equal to but not better or more extensive than its condition and extent at the time the damage occurred, taking into consideration the age, condition and remaining useful life of the asset.
[92] The guidance is, I accept just guidance. It is not legally binding. But it aligns with the principles of law already discussed.
[93] The difficulty for Mr Michalik in this case is that the approach taken by Mr Pātete was precisely in accord with the authorities and the Guidance Note. As I have said he estimated the present day cost of building the same wall – i.e. reinstating it – adding an additional amount for fees and consents and then deducting depreciation.
Conclusion
[94] The answer to the second question is, therefore, “yes”. I conclude accordingly that the methodology EQC used in deriving the indemnity value of the damaged portion of the retaining wall was consistent with the controlling legislation.
Partial or full replacement?
[95] There remains one argument to be dealt with. Mr Michalik argues that the slip that damaged his retaining wall essentially destroyed it and he should have been entitled to recover a sum equal to the cost of reinstating the whole structure. The Tonkin & Taylor report found that 5.5m2 of the retaining wall had been destroyed
and a further 1m2 was at imminent risk of destruction. The report therefore
30 New Zealand Valuation and Property Standards Manual.
calculated Mr Michalik’s entitlement on the basis of the reinstatement cost of 6.5m2
of the retaining wall.
[96] The Tonkin & Taylor report does not record the total area of the retaining wall. Neither does the sketch plan of the landslip attached to the report Mr Michalik does not in his affidavit provide any details as to the total area of the retaining wall, nor why it was the case that the entire retaining wall should have been replaced. Ideally this was a matter that ought to have been put to EQC when it considered the claim and, if necessary, should have been accompanied by engineering or other evidence in support. It is impossible to address a factual issue of this nature on judicial review without any evidence at all on the question. I do not see that this argument has merit.
Disposition
[97] The application for judicial review is dismissed accordingly. EQC will be entitled to costs. I apprehend that the time and energy put in to defending this application reflected its significance to EQC as a potential precedent. EQC will be entitled to some costs – after all the plaintiff commenced the proceeding – but an appropriate deduction will be made in light of the wider significance of the questions raised in the application.
[98] If the parties cannot agree an approach, they may file memoranda.
Williams J
Solicitors:
Chapman Tripp, Wellington
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